Key takeaways
Updated principles clarify social loan standards
New definitions and guidance improve consistency across markets.
Expanded categories and reporting obligations
Broader project scope and stricter transparency requirements apply.
No grandfathering: compliance is immediate
All social loans must align with 2025 updates now.
Social Loan Principles (SLPs) were first introduced in 2021 with the aim of providing general guidelines and a streamlined framework across the finance market for the implementation and development of social loan products.
The SLPs were welcomed by the trade finance industry in providing clarity around social lending and facilitating sustainability linked finance.
On 26 March 2025, the loan market trade associations published updated versions of the SLPs, together with related Guidance.
This article provides some background on social loans and highlights some of the changes introduced by the updated SLPs.
What is a social loan?
In its broad definition, a social loan (SL) is a financing instrument, whose proceeds shall be used exclusively for the financing, re-financing and/or guaranteeing of social projects (whether existing or new), with an objective to mitigate the current social challenges and contribute to positive social changes. To facilitate the market, a non-exhaustive list of eligible Social Projects categories has been included in the SLPs, together with a list of targeted populations.
In principle, the characterisation of a loan as “social” is based on the following key elements:
the use of the loan proceeds;
the process of the projects’ evaluation/selection;
the management of the proceeds; and
reporting.
Nonetheless, one should have in mind that geographical and other factors can vary the definition of a Social Project and market stakeholders may interpret and apply such guidelines as appropriate in order to classify a loan as “social”.
Why enter into a SL?
There are several incentives (practical and socioeconomical) leading a market player to enter into a SL. Reputational aspects and/or internal policy goals are usually primary factors affecting the decision-making process.
Highlights of the updated SLPs and Guidance
In March 2025, with a view to provide market stakeholders with further clarity and guidance on the SLPs, the Loan Markets Association (LMA), the Asia Pacific Loan Markets Association (APLMA) and the Loan Syndications and Trading Association (LSTA) launched updated versions of the SLPs and associated guidelines (Guidance).
A summary of the key revisions highlighted in the updated SLP and related Guidance which shall apply and may impact current and future transactions (always to be read in line with the pre-existing SLPs) is set out below:
Terms definition: the objective of certain (auxiliary) verbs (e.g. clarifying the obligatory or the discretionary nature of an action or provision under the SLPs) has been introduced in order to facilitate the interpretation of the SLPs’ provisions and applicable context (namely – “shall” indicates mandatory requirement, “should” indicates recommendation, “may” indicates optional course of action and “can” indicates possibility or capability).
Removal of grandfathering language: going forward all transactions involving a SL, irrespective of their completion date should be in line with the updated 2025 SLPs and Guidance. The distinction between compulsory and optional guidance is now apparent.
Social Projects/Target populations: additional non-exhaustive categories of Social Projects (as defined therein) and examples of target populations have now been introduced. Climate considerations have also been established.
Use of proceeds and evaluation process: It has been established that where a tranche under a loan has been classified as “social”, such characterisation does not extend to the whole loan but only the relevant tranche. In principle, as there is no international definition of “social loan”, external indices and/or reviewers might be of assistance in such determination process. Meanwhile, the borrower has a continuous disclosure obligation regarding the allocation of funds to assets and expenditures closely associated with social benefits. The classification of a loan as social or other “classified” loan usually depends on the primary objectives of the borrower.
Management of proceeds: Temporary placement of unallocated funds is permissible, subject to the borrower taking all necessary steps to make sure that the allocation is in line with the social goals and nature of the loan. The updated SLPs now include reference to the net proceeds of the loan or “an amount equivalent to the net proceeds” providing greater flexibility on the management of funds.
Reporting: Achieving and maintaining transparency is a key factor in the life cycle of a SL. In terms of the allocation of the loan proceeds, a borrower has the discretion to either identify a target population or benefit the entire population. Borrowers are now required to make and keep readily available up-to-date information on the use of proceeds. Annual update on the loan proceeds’ allocation is proposed as a minimum (or more frequently if agreed between the parties) and the reporting should continue until the loan is fully allocated or (in case of revolving facilities) throughout the loan period. Either an actual or estimated impact of a certain social project shall be reported and especially in the case of general population impact, with additional reporting obligations applying to the prospective borrower. Publicisation of any SL projects should be sought where feasible from a confidentiality or competitive perspective.
Review: alignment of the SL with the key elements of the SLPs should be reviewed/approved by either an external reviewer or via self-certification by a borrower itself, subject to the background of each transaction. Nonetheless, it is advisable to engage an external reviewer where the borrower’s background and expertise are not adequate for self-certification.
SL Advantages: the benefits list related to a SL is extended and re-evaluated based on each benefit’s purpose.
Proforma provisions: Whilst there is no proforma template wording available for SL documentation, certain model provisions introduced for green loans might be of assistance. Nonetheless, each case should be considered separately in order to assess the relevant factors of each transaction. Previous specific key considerations under the 2023 guidelines (i.e. Purpose/use of proceeds provisions, Information undertakings/covenants, Representations, Conditions precedent, No communication, Social Loan Coordinator and Declassification) for drafting a SL have now been removed and the APLMA’s Model Provisions for Green Loans (June 2024), the LMA’s Draft Provisions for Green Loans (November 2024) and the LSTA’s Drafting Guidance for Green Loans (March 2025) are suggested as starting points to be adapted for drafting purposes, but always subject to sector-specific customisation and negotiation.
Comment
It is encouraging that socially responsible investing continues to develop and attract the interest of international stakeholders and investors. As a result, it is important for all market participants to remain up to date with any developments and clarifications that might affect their decision-making and financial practices.
